Preventing foreclosures should be cheaper for lenders. Why don’t they do it?

A new study, by Professor Alan White of Valparaiso University law school, proves what most people in the foreclosure prevention business have been saying:  Lenders do not want to modify loans, and when they do, they do it in a way that often does not work, even though a successful modification will usually cost them less than foreclosing.

Professor White analyzed 3.5 million sub prime and “Alt A” loans and found that modification numbers are low and appear to be falling, despite the Obama administration’s new subsidies for modifications.  In June 2009 only 18,179 mortgages were modified.  In that same month, 281,560 foreclosures were in process.

The losses on these foreclosures are shocking.  Professor White analyzed 32,000 liquidations sales in June.   The average loan balance was $233,000, but the average property sold for  $144,000 less than that!

Given these numbers, White says that he does not understand why lenders refuse to cram down the principle on their delinquent loans.  As I have said before in this BLOG, the lenders would lose less and people would get to keep their homes.   Professor White put it this way in the New York Times:

“There is 100 times as much money lost in foreclosure sales as there was in writing down balances in modifications.  That is not rational economic behavior.”

Let’s hope the people who run the banks read this Sunday’s Times!

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